How does this jive with the story Charlie Boss wrote for the January 20, 2013 issue of the Dispatch, where she reported on the large number of teachers that seem poised to retire this year?
I've been writing for several years about the solvency of the State Teachers Retirement System (STRS), hoping to alert both teachers and community members to the need to reform the structure of this system if it is to survive. Mostly my objective has been to point that most of the fiscal problems troubling STRS is of their own doing, and to object to any move to have taxpayers bail them out. But there is also the reality that the poor decisions that benefit one generation - mostly mine, the Boomers - get paid for by the following generations - our children.
There is no safety net for the teachers should STRS go bust. The teachers do not participate in Social Security, nor does the school district make Social Security contributions on their behalf. STRS is it for them. So if STRS becomes unable to pay the benefits promised, the teachers are in a lot of trouble.
Pension funds are a pretty simple concept: a member, and usually the employer, make contributions to the fund while the member is working. Then the fund managers invest the contributions in hope of boosting the amount of money in the fund. When the worker retires, contributions by that worker stop, and benefits begin being paid to the worker, usually to the end of life.
That sounds a little like an IRA or a 401(k) account any one of us might have. We put money in those accounts, and sometimes the employer kicks in a little too. We invest it to earn some extra money. Then at some point we stop putting money in, and start taking money out.
But there's a big difference: a retirement fund is a pool, with all the working members contributing to a common fund. All that combined money gets managed and invested as a huge portfolio. All the while some members have retired, and switched from contributors to beneficiaries. There is money going in, money being invested, and money being paid out - all at the same time.
With an IRA/401(k) plan, you can start withdrawing money at age 59 1/2, and take it out at whatever rate you want. But when the money is gone, it's gone. If you don't put enough in over your lifetime, don't earn enough on your investments (eg - like in our current interest rate environment, where CDs and other 'safe' investments earn nearly zero interest), or withdraw too much too soon, you can run out of money. Tough luck if that happens.
That's a lot less likely with a retirement system like STRS. It's not just you putting money into the system, it's all the members and all the employers. There are currently about 75,000 active public school teachers in Ohio, plus all the administrators and other professions who are members of the system. Since 2003, teachers have been contributing 10% of their salary to STRS, and the school district (ie the taxpayers) another 14%. With the statewide average teacher salary of about $58,000 (from the Ohio Dept of Ed CUPP report), this means the average teacher contributes $5,800/yr from their own paycheck, while the school district contributes another $8,120, or $13,920/yr. Multiply that by 75,000 teachers you get about $1 BILLION in new contributions each year.
That's a lot of money. As teacher salaries accelerated dramatically in the past couple of decades, the pension fund grew to be quite sizeable - about $80 billion by 2007. While the rising levels of contributions had a lot to do with the fund growth - including the teacher contribution increasing steadily from 8.5% in 1978 to the current 10% rate starting in 2003 - a good part of it was due to some extraordinary luck the investment managers at STRS had as well. They caught a kind of perfect storm, where contribution levels were high, the investment markets in which they participated (primarily common stocks and real estate) were booming, and the benefits being paid out were relatively low, because their retired members we getting benefits based on past salaries, which were much lower than today.
The STRS Board looked at all that cash building up, and decided they could increase the benefits they paid out to members. Existing members were given a "13th paycheck" each year - essentially an 8.3% increase in their annual pension. And for members yet to retire, the real bonanza was put in place.
Prior 1989, STRS members received 2.0% of their "Final Average Salary" (the average of the salaries of their final three years of employment) times the number of years of service. In other words, a teacher who was paid $50,000/yr for the last three years, and who retired with 35 years of service, would receive an annual pension of $50,000 x 35 x 2.0% = $35,000.
In 1999, the percentage was increased to 2.2%, meaning that a teacher with an FAS of $50,000 and 35 years of service would receive a pension of $38,500. But during those 10 years, the FAS would likely have increased from $50,000 to something around $67,000 (assuming 3% annual raises). That would make the pension be $67,000 x 35 x 2.2% = $51,600, or more than the final working salary of the teacher who retired just ten years earlier.
But that's not all. Also included in the 1999 modification was a 'kicker' which awards a teacher completing 35 or more years of service a multiplier of 2.5%, rather than 2.2%. This means the teacher retiring in 1999 would receive $67,000 x 35 x 2.5% = $58,600.
The good days ended in 2007 when both the stock market and the real estate market tanked. The size of the STRS retirement fund dropped from $80 billion to $47 billion in a matter of months - a loss of 41%. In other words, money equal to 33 years worth of contributions just evaporated. The fund managers would need to increase the size of the now shrunken fund by 70% just to get back to were they were (chart from Kathy Bracy's blog).
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So something had to change, and finally it has. Last year, the STRS Board and the General Assembly enacted changes to the rate of contributions (for the teacher, not the taxpayers) and the number of years service required to retire. The 35 year kicker was eliminated for those who retire after July 1, 2015. This is why any teacher who will reach 35 years of service before that date will almost certainly retire by the 2014-2015 school year. Here in Hilliard, we gave our teachers a little extra incentive, with a one-time $40,000 bonus for retiring last school year or this school year.
So how do we reconcile the STRS Survey saying teachers think they'll be working longer than they had planned, and Charlie Boss' story saying that they will be retiring in droves?
It all depends on which side of that July 1, 2015 date one plans to retire. If you had always planned to retire before 2015, little has changed. If you had planned to retire after 2015, but will reach 35 years of service by then, you pretty much have to retire before 2015, or you'll leave too much money on the table. That's certainly a significant component in Superintendent Dale McVey's decision to retire this year.
But if your retirement date is after 2015, it's a different world. You're going to pay more into the system, and get less out. Consequently those teachers are expecting that they'll have to work longer to earn enough benefits to afford retirement.
We Boomers are coming to a time when we have to face up to this. We've largely been a 'consumption generation.' We live in a world where our parents paid the price to win World War II, then came home to build most of the infrastructure we count on for every day life. Our generation has built our wealth by consuming that infrastructure, and not doing nearly enough to maintain it, or replace it when it reaches the end of its design life.
The roads and electrical power systems are two glaring examples. We've created a regulatory environment where heavy trucks tear up our highways, when lots of that freight should be carried on the railroads (the railroads themselves carry their share of the blame as well). On those occasions when I choose to ride my motorcycle on a freeway, I have to make sure to preserve a sight line far enough ahead to detect and avoid potholes that could easily knock me off the bike. That's the reason I much prefer the back roads for short distances, and little used US highways for longer ones (US 89 is a favorite).
We generate 20% of our total electrical demand with nuclear power plants, many of which are operating well past their planned life. Not that I'm opposed to nuclear power - as long as our appetite for electricity keeps growing, nuclear power is absolutely necessary, and new plant designs are much safer than those now in operation.
But we Boomers won't be paying for the road reconstruction, new nuclear power plants, or a smart power grid. Our time to generate that kind of funding has largely passed. It is our children who will bear this burden. Nor will we have fully paid for all the retirement benefits we'll consume, be it private pension benefits, Social Security, or Medicare/Medicaid. They'll being contributing to that as well.
The least we can do is get out of the way and let all these unemployed and underemployed young people with huge student loans get a toehold on life...
... anyone remember Logan's Run?